Throughout this year and last, financial consultant Jim Stoops of the Naperville office of Charles Schwab has come away impressed by many of the 60-, 70- and even 80-year-old individuals he has counseled. These are people who decades ago took on mortgages they could afford, and viewed the houses they purchased not as places that could make them money, but in which to live and raise kids. These are the very people who now are able to weather the financial crisis without fear they will lose their homes.
Many years before, Stoops says, they "analyzed their budgets, purchased below their means, paid off their mortgages steadily and in some cases early, before the mortgages were due. But when there was financial turmoil, they were the ones who were more confident than others in their own personal financial security.
"That's what sticking to the basics leads to, 30 years down the road," he says.
Many of today's far younger homebuyers could take lessons from their older forebears, home financing experts say. It's clear that, in Stoops' words, by "sticking to the basics," carefully thinking through how much can be afforded and how far to stretch without stretching too far, then making sure reputable lenders are used and the best available interest rates are garnered, buyers can avoid getting in over their heads.
The first step is to sit down at the kitchen table and analyze your budget, deciding how high a monthly mortgage payment you will be comfortable paying, says Brad Harding of Fifth Third Bank. Shelling out 30 percent of monthly income on a mortgage payment may be fine for folks who don't spend lots of money on discretionary items, he says. But spending the same percentage on a mortgage may be unwise for those who prefer to dine out regularly and take lots of vacations.
In general, Harding doesn't advise anyone to spend more than 45 percent of their gross income on monthly debt, including house, car, credit card payments and others.
Staying within your comfort zone is made tougher by some lenders' tendency to green light loans larger than borrowers can truly afford, Diann Patton, consumer real estate expert for Coldwell Banker in Grass Valley, Cal., says. "A mortgage professional will tend to give you the amount you can afford on paper, based on your gross income, and forget people occasionally like to go out to dinner and buy a new TV," she adds.
Even if granted larger loans, stick to your own comfort level. "I would start with the real estate professional," she says. "They have great relationships with the mortgage professional, and it's a better process if all three parties are communicating."
Stoops echoes the importance of buyers staying within their comfort levels, even if their lenders make greater sums available.Imagine a couple earning $7,000 a month, qualifying them for a $300,000 home with a $60,000 down payment and a monthly mortgage payment of about $1,800. But what if the couple had been paying $1,100 monthly in rent? "Can you afford that $700 monthly increase in expenses?" Stoops asks. "The bank doesn't know about your retirement goals, doesn't know if you're saving for a child's college education."
Before the housing bubble burst, there were all kinds of innovative loan products in existence to get folks into homes they really couldn't afford, he adds. "Now banks are becoming more stringent in determining how much they can lend on a home loan, and are a lot less creative," he said, adding this is more realistic. "The people who took realistic views of their ability to pay back loans are the ones who didn't get into trouble."
Getting better interest rates
Before trying to get a great interest rate on a home, it pays to spend two or three months working on your credit report, if you haven't already done so, Stoops says.
Too few people understand what's on their credit reports, and how to deal with the situation if problems are discovered. "As soon as you find a problem or an issue you don't understand, file a discrepancy report," he says. "The credit agencies make it very easy to do this. Filing a discrepancy report can often result in substantial increases in your credit score, increasing your likelihood of getting the best rate."
Next, shop &151; really shop &151; for a loan. "Speak to more than one lender to make sure that you are getting a competitive interest rate," Harding said. "Speak with two or three lenders, and also make sure you compare their closing costs as well."
You may be tempted to go to the biggest names in the home lending market, but don't overlook more obvious ones as well. That could start with your own bank. There likely will be less documentation required by doing business with the bank you already are familiar with, Stoops says. "They will have all the documentation on file," he added.
Harding agrees. "One of the lenders you should always check with is your own bank," he says. "A lot of times your bank may offer you special savings or rewards for obtaining your mortgage through them."
If you decide to work with lenders other than those you already know, make sure they are reputable. One of the best ways to find trusted lenders, is to ask for referrals from family members, friends and from real estate professionals with whom you have worked in the past. Always be cautious of lenders bearing offers that seem too good to be true, Patton says. "Ask questions, and make sure you're getting the right answers."
When choosing among lenders, do business only with those allowing you the chance to sit down in person with their representatives, Harding says. During the course of purchasing a home, there may come a time where you will feel the need to speak to somebody face to face to review your options. "Considering that this is probably the largest single borrowing decision you will ever make, I think it is comforting to know you can deal with someone face to face," he said. "If you obtain your mortgage through a 'call center' or through the Internet, you will not have this option."
For his part, Stoops recommends soliciting both word of mouth referrals and input from the Better Business Bureau when narrowing down your choices. "You have to be careful with the people you're working with," he says, noting it's best to choose a lending partner who focuses on the big picture.
"Are they just trying to close the mortgage? Or are they looking to establish an ongoing relationship, and looking at what you can truly afford?"In addition to cleaning up your credit report and then shopping around for the best rate, you should also keep in mind that you can pay more "points" at closing time and essentially "buy down" your mortgage rate. "When we pay discount points, we're paying a percentage of the loan," Patton says, adding that can actually reduce interest rates by one-fourth or a half percent, depending on how many discount points are paid.
Moreover, in this difficult market, those selling their homes are often participating in the borrowers' closing costs, she adds. They will also pay the discount points, enabling the borrower to reduce his or her interest rates over the next 30 years.
"That's a significant savings to the borrower every single month," she notes.
Going through the process
As has been restated many times, it's important for buyers to get pre-approved before entering the home buying process, so they will know how much they qualify for and what kind of home they can afford. This allows a smoother and quicker process for buyer and seller, Patton says. "A borrower has to be prepared to have their financials, their income, their taxes and their credit report given to the mortgage professional," she said. "The more information they have up front, the quicker the process."
Harding, who also strongly recommends being pre-approved for a loan, reports the approval process can take from a couple days to about a week.Once a house has been chosen, the home inspection should be undertaken to ensure there are no faults or problems that could halt the purchase, Patton added.
This is an ideal time for the would-be buyers to check every aspect of the neighborhood and make sure it is the right one for them. Also during this period, the lender will send out an appraiser who confirms the value of the property is at least the same as what the borrower has agreed to pay. Once the inspections and appraisal are complete, the closing date is selected and the parties go through the closing, she said.
"It's a great time to buy a house," Patton concluded. "We have terrific interest rates, an inventory of great homes on the market, and [just over a month left] on the $8,000 First-Time Buyers Tax Credit."